#cfa-level-1 #economics #microeconomics #reading-15-demand-and-supply-analysis-the-firm #section-3-analysis-of-revenue-costs-and-profit #study-session-4
Exhibit 3 shows a summary of the terminology and formulas pertaining to profit maximization, where profit is defined as total revenue minus total economic costs. Note that the definition of profit is the economic version, which recognizes that the implicit opportunity costs of equity capital, in addition to explicit accounting costs, are economic costs. The first main category consists of terms pertaining to the revenue side of the profit equation: total revenue, average revenue, and marginal revenue. Cost terms follow with an overview of the different types of costs—total, average, and marginal.
Exhibit 3. Summary of Profit, Revenue, and Cost Terms
| Term | Calculation |
|---|
| Profit | |
| (Economic) profit | Total revenue minus total economic cost; (TR – TC) |
| Revenue | |
| Total revenue (TR) | Price times quantity (P × Q), or the sum of individual units sold times their respective prices; ∑(Pi × Qi) |
| Average revenue (AR) | Total revenue divided by quantity; (TR ÷ Q) |
| Marginal revenue (MR) | Change in total revenue divided by change in quantity; (∆TR ÷ ∆Q) |
| Costs | |
| Total fixed cost (TFC) | Sum of all fixed expenses; here defined to include all opportunity costs |
| Total variable cost (TVC) | Sum of all variable expenses, or per unit variable cost times quantity; (per unit VC × Q) |
| Total costs (TC) | Total fixed cost plus total variable cost; (TFC + TVC) |
| Average fixed cost (AFC) | Total fixed cost divided by quantity; (TFC ÷ Q) |
| Average variable cost (AVC) | Total variable cost divided by quantity; (TVC ÷ Q) |
| Average total cost (ATC) | Total cost divided by quantity; (TC ÷ Q) or (AFC + AVC) |
| Marginal cost (MC) | Change in total cost divided by change in quantity; (∆TC ÷ ∆Q |